Emphasizing the Exchange Rate Volatility and Firm Performance in Nigeria: A Dynamic Panel Regression Approach

Firm performance has played a central role in management research. This study investigated the
effects of exchange rate volatility on the firm's performance in Nigeria by examining cross-sectional
data for the most active 20 companies listed on the Nigerian Stock Exchange. The study developed
three dynamic panel models that account for heterogeneities among the companies, and it extended
recent research by allowing international investors and corporations to base their investment
decisions on the exchange rate volatilities between the Nigerian Naira and their home country
currencies. The method used in the study is the dynamic panel data approach applying the Arrelano-
Bond dynamic panel-data and Arellano-Bover generalized method of moments (GMM) estimators.
The variables used in the study to proxy firm performance are the rate of return on assets (RRA),
asset turnover ratio (ATR), and portfolio activity & resilience (PAR) variable. While RRA variable is
obtained by simply dividing the firm's profits by the total assets of the business, ATR variable and the
PAR variables are obtained by dividing the firm's sales revenue by the assets employed in the
industry and by dividing the percentage change in sales by the percentage change in gross domestic
product GDP. The exchange rate volatility variable is simply obtained by taking the square of the
mean adjusted relative change in the official exchange rate. The result of the paned data estimate
shows that there is no significant difference between the Arrelano-Bond dynamic panel approach and
Arellano-Bover generalized method of moments (GMM) estimators. The result of the three estimates
revealed that exchange rate volatility has significant negative impacts on the rate of return on assets,
asset turn ratio and the portfolio activity & resilience, thus, establishing that there exists a significant
negative effect of exchange rate volatility on firm performance in Nigeria between 2004 and 2013.
Some policy implications can be drawn from this analysis for investors and financial market
participants. Because all firms are not uniformly susceptible to exchange rate volatility, risk
diversification possibilities across industries are recommended. Overall, the study suggests that the
higher the exchange rate volatility in an economy, the less efficient will firms operating in the economy
and by implication, the lower will be firms' operating performance.